Ghana surprise rate hike betrays African unease ahead of key US decision

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With US Fed meeting this Thursday for a much-watched meeting, the continent will be holding its breath--the outcome portends much for its economy.

GHANA unexpectedly raised its benchmark interest rate to curb inflation and stem further currency weakness as the US prepares to tighten monetary policy, possibly as early as this week. 

The Bank of Ghana increased the policy rate by 1 percentage point, Governor Kofi Wampah told reporters in the capital, Accra. All 10 economists surveyed by financial data firm Bloomberg predicted the rate would stay unchanged. 

The cedi extended its decline after the decision, dropping 8.9% to 3.09 per dollar at 1:44 p.m. in Accra.

Policy makers have raised borrowing costs by 5 percentage points since last year to bolster the currency, which has dropped 19% against the dollar this year, and curb inflation. Consumer price increases have remained above 15%, outside the bank’s target of 6% to 10%, for more than 14 months. Trading in futures indicates that there is a 30% chance the the Federal Reserve may raise its rate as soon as September 17, its next meeting.

One of the main reasons for an increase was “to position the market in advance of what is to happen in the U.S. this week when the Fed meets to take a policy decision,” Courage Kingsley Martey, economist at Accra-based Databank Group Ltd., said by phone.

“Our market is not in isolation.”

The domestic economy continued to face challenges because of power shortages and fiscal consolidations, the committee said. Foreign gross reserves dropped $1.1 billion to $3.2 billion in June, while the government cut its growth forecast for 2015 to 3.5%, the slowest in about 20 years, from 3.9% in July.

“The decision of the committee to increase the policy rate is consistent with the bank’s forecasts, which requires further tightening in order to bring inflation back within the target band by the end of 2016,” Wampah said. “The committee will continue to monitor developments and take appropriate action if necessary.”

Keeping an eye on volatility
The central bank is keeping on eye on volatility in financial markets, the uncertainty in timing when the the US Federal Reserve will raise its benchmark interest rate and a drop in commodity prices, including oil, according to the statement.

“Given that the Bank of Ghana’s foreign reserves have fallen substantially in recent years, interest rates are the only weapon to shore up the currency,” London-based Capital Economics said in a note to clients after the decision. 

“With the economy likely to remain weak and inflation set to ease, we don’t see further rate hikes.”

Last month the Bank of Ghana merged the policy rate and reverse repo rate at 24%. The policy rate was previously 22%. The bank said at the time the adjustment didn’t reflect further tightening in the monetary policy stance.

The government will start the roadshow for a $1.5 billion Eurobond on September 22, Wampah said

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